February 18, 2018

SEOUL (Reuters) – The shock arrest of the head of South Korea’s Lotte for bribery sent shares in group firms plunging on Wednesday as investors fretted about a leadership vacuum at a challenging time for the country’s fifth-largest conglomerate.

The Seoul Central Court on Tuesday sentenced Lotte Group Chairman Shin Dong-bin to two years and six months in prison in a case tied to an influence-peddling scandal that has rocked the country’s business and political elite.

Shin had widely been expected to get a suspended sentence at most.

His detention is expected to hamper both Lotte’s investment plans and efforts to streamline, that were partly aimed at offsetting losses in China.

It also leaves the door open for a family feud to reignite, analysts said.

“Lotte Group is currently in flux. It’s businesses are mainly domestic. Shin has attempted to expand Lotte overseas by growing its chemical business and retail presence in Asia, but that is expected to grind to a halt – at least until the appeals ruling,” said Park Ju-gun, head of research firm CEO Score.

Shares in Lotte Corp, the holding company of Lotte Group, tumbled more than 7 percent to its lowest in almost eight weeks, while flagship retailer Lotte Shopping slid 5.5 percent, marking its lowest point since early January.

Lotte Group said after Shin’s arrest on Tuesday it will begin “emergency operations” to “put the minds of stakeholders at rest”. Analysts have said they expect Hwang Kag-gyu, the co-CEO of the South Korean holding company, to take a leading role but that major decisions are likely to be put on hold.

Shin’s appeals trial is expected to take months.

Lotte had been in the process of transferring control of various units to Lotte Corp after it debuted in late last year, but analysts said the work is partially done, as Lotte Corp does not control Lotte Chemical and key unit Hotel Lotte.

Lotte Group expressed concern on Tuesday that Shin’s arrest could hinder plans to list Hotel Lotte.

Lotte Group has sought a fresh opportunity to list Hotel Lotte after a planned $4.5 billion IPO was scuppered in 2016.

Lotte also planned this year to expand its presence in overseas markets such as Vietnam and Indonesia, since Lotte units sustained losses in China, where it was forced to close stores as business suffered following “fire inspections” that were ordered after a U.S. missile defense system was deployed in South Korea on land provided by Lotte.

In a further setback for Lotte Korea Customs Service has said it would consider whether to cancel Lotte Duty Free’s license at its Lotte World Tower location in southeast Seoul, after the court said on Tuesday that Shin conducted bribery to help obtain the license.